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Durbin 'Ripple' for Community Banks Banks with less than $10 billion in assets will not be materially harmed by the Durbin Amendment – actually, they will receive significant competitive advantages vis-à-vis the larger banks. by CHRISTOPHER LEONARD Jun 17, 2011 |
3 Comments

I suppose I should be flattered when a U.S. senator points to an article I have written in his widely-publicized letter to the American Bankers Association. In defense of his position that his interchange amendment would not harm under-$10 billion-asset financial institutions, Sen. Dick Durbin (D-Illinois) cited my statement in American Banker that “despite fear that has run rampant through under-$10 billion banks, we think they are winners” under the Durbin Amendment, which reduces debit card interchange for banks. Of course, he conveniently omitted my statement that, in addition to the big banks, “the other big losers under the Durbin Amendment are consumers.” Last time I checked, every American is a consumer.

In any case, Sen. Durbin is correct that banks and credit unions with under $10 billion in assets will not be meaningfully affected by the Durbin Amendment. I continue to hear statements like “a falling tide lowers all boats” but when you really analyze the situation, this argument does not hold water. For anyone except the top 100 financial institutions, Durbin will be little more than a ripple.

In his testimony on the Senate floor, Sen. Durbin addressed some of what he called “creative arguments” for why the under-$10 billion exemption might not work. Frankly, these are not really the creative ones – they are the obvious ones and easy for Sen. Durbin to dismiss, so let’s dispense with them quickly:

Having different prices for the same product (i.e., separate interchange rates for the same transaction) is not sustainable. Again, clearly false. As Sen. Durbin points out, credit card rewards cards already carry higher interchange rates than non-rewards cards, and this has been going on for many years.

If interchange on big bank cards is less, merchants will steer consumers to using big bank debit cards. This is certainly a fallacy and we can look at American Express as an example. Their credit card interchange rates are higher. But have you ever had a merchant who accepts AmEx but sees a Visa debit card in your wallet ask you to use that one instead?

So if these aren’t the “creative arguments” for the falling tide theory, what are? Try these, which are more complex to analyze:

Visa and MasterCard are going to experience pricing pressure from the over-$10 billion institutions since their debit interchange revenues are being cut; to recover those funds, they will take it out on under-$10 billion institutions.

The crux of this scenario is that Visa and MasterCard don’t want to move backward from a pricing standpoint but may be forced to, as the over-$10 billion institutions see everything having to do with their debit business shrinking. Also, Visa and MasterCard undoubtedly will have additional costs to build and operate a separate tier for under-$10 billion institutions. To make up for their potential pricing decreases from the over-$10 billion crowd, and to pass along their costs of creating a separate tier for the smaller institutions, maybe they will try to increase fees on the under-$10 billion banks, or so this argument goes.

If this happens, it means that Visa and MasterCard are opening the door to further Congressional intervention, and they know it. As the Durbin Amendment is implemented, you can bet that Sen. Durbin is going to be all over Visa and MasterCard like white on rice. If the additional cost is anything more than a blip to the under-$10 billion banks, you can be assured that he is going to get back on the Senate floor and smack Visa and MasterCard publicly. Even before the Durbin Amendment became law, he sent a letter to the two networks saying, “I ask you each to state unequivocally that you are neither threatening nor planning to take steps that would purposefully disadvantage small institutions … Further, I warn you that if your companies coordinate with each other or collude with your largest member banks to make changes to your fees and rules, it would raise serious concerns that you are engaging in an unlawful restraint of trade.”

The biggest merchants will not be satisfied just to get lower interchange on the 60% of transactions from the over-$10 billion institutions – eventually they are going to figure out ways to lower interchange on the other 40% of transactions from the smaller banks.

There are only two ways I see this happening, and neither will have a meaningful impact. The first way would be for merchants to simply ask for lower interchange on the under-$10 billion issuer side and say it isn’t fair that they are paying three to four times as much for these issuers as compared to the larger banks. My question is: why would anyone ever agree to do this? There is no requirement to do this (intentionally so under Durbin) and it does not benefit the smaller issuers and it does not benefit Visa and MasterCard. So, why would it ever happen?

Some say that “market forces” will cause downward pressure on these interchange rates. Hogwash. “Market forces” have led to where we are today – a situation where interchange is high enough that there has been legislative intervention. The notion that interchange is going to get lowered just because one tier of transactions happens to be cheaper for the merchants is not borne out by market experience – again, look at different rates for rewards vs. non-rewards cards.

The second way would be for the mega-merchants to start putting cards into consumers’ hands that give the merchants their own slice of the pie. For example, there could be a Walmart-branded decoupled debit card. As you probably know, CapitalOne tried a decoupled debit card in a partnership with the Ukrops grocery store chain. I just Googled “decoupled debit card” and all but one of the results with dates on the first results page are from 2007 or 2008 – proof that all of the hype years ago about the decoupled debit card has fizzled.

Let me tell you, from many years of experience trying to create merchant partnerships with financial institutions, this is one of the hardest things we have ever done and it is also extremely difficult to get consumer buy-in. The market is a very long way off from having these kinds of cards in any significant number, especially to the point that they would make a dent in the volumes seen by debit card issuers.

I’d like to conclude with another common statement from Sen. Durbin that is misleading. He has argued numerous times that since interchange rates in Canada are zero, why are they so “high” in the United States? A paper released last month notes that the costs are still there in Canada – they are just shifted to consumers. Canadians with basic bank accounts pay 60 cents to 65 cents every time they use their debit card if they have more than 10 to 15 check, debit, ATM and other transactions in a month, plus about $48 per year in account service fees. Americans do not pay per-transaction debit card fees and more than 75% had free checking accounts in 2009, while only 30% of Canadians had monthly service fees waived. Canadians’ debit cards also do not work outside of Canada except for a limited number of U.S. merchants and some debit cards don’t work at all for Internet, mail or telephone purchases.

The Durbin Amendment will mean that the over-$10 billion institutions may have to start charging consumers checking account fees, as in Canada. This gives the under-$10 billion institutions a significant advantage in that they will continue to be able offer free checking accounts, offer richer rewards to consumers and spend more on marketing themselves to prospective account holders.

Ultimately, despite the perception of the “falling tide,” that’s a massive lifeboat for the under-$10 billion institutions.

Mr. Leonard is chief operating officer and general counsel for Wilmington, N.C.-based Velocity Solutions, Inc., a provider of fee income enhancement strategies to community and regional banks and credit unions. He can be reached at christopher@myvelocity.com.

Don't worry about Visa and MC. They don't earn interchange, that goes to the banks. VI/MC earn money regardless of interchange. I think the author missed the boat on multiple fee categories on the same card type. This is going to be a very complex BIN registry system to make sure the card gets hit the lower rate or the higher rate based on the institution. Also what happens to PIN debit? are they locked into only $0.12 for fees? Most have minimums higher than that. What merchant would take PIN debit at $0.30 a transaction if they can have it for $0.12? Unintended consequences. Price fixing does not work.

david proffitt6/20/2011 2:19 PM

This article is misleading. It will impact all of us. In addition, VISA and MasterCard will pass on their loss of income, they have no choice. The paragraph quoted below from the article shows how grandstanding this had become for Sen. Durbin and the writer is a part of it;
“If this happens, it means that Visa and MasterCard are opening the door to further Congressional intervention, and they know it. As the Durbin Amendment is implemented, you can bet that Sen. Durbin is going to be all over Visa and MasterCard like white on rice. If the additional cost is anything more than a blip to the under-$10 billion banks, you can be assured that he is going to get back on the Senate floor and smack Visa and MasterCard publicly. Even before the Durbin Amendment became law, he sent a letter to the two networks saying, “I ask you each to state unequivocally that you are neither threatening nor planning to take steps that would purposefully disadvantage small institutions … Further, I warn you that if your companies coordinate with each other or collude with your largest member banks to make changes to your fees and rules, it would raise serious concerns that you are engaging in an unlawful restraint of trade.”
I don’t think Sen. Durbin “being all over VISA and MasterCard” and “smacking VISA and MasterCard publicly” will have them shaking in their boots, nor his threat of “unlawful restraint of trade”. Visa and Master Card have a business to run. What senators would support Senator Durbin next time on this issue and credit unions will be stuck with trying to mitigate the fall-out for our members?

nh banker6/20/2011 2:07 PM

It would be refreshing to read an interchange article where authors are a bit less sure of themselves, considering the final rule hasn't been written and no on really knows how the major stakeholders will act. There are some reasonable points here but the author assumes Durbin is Banking Chair forever. Ranking minority members don't hold anyone's feet to anything. Also, he underestimates the desire of large retailers to lower costs, escpecially the large-margin guys, and there's lots of them. They've done the math on the under $10 billion volume. It's not pocket change.
I wouldn't want to be a small bank surrounded by $10 billion+ banks in a metro market.